Thursday, July 2, 2009

Economic Survey 09-10

India could see growth this year of roughly 7 percent and then resume the faster expansion of recent years, provided it makes sweeping reforms including removal of fuel subsidies and accelerates infrastructure development, a key government report said.

The economic survey prepared by the finance ministry, released ahead of Monday's budget announcement for the fiscal year ending in March 2010, said inflation is no longer a worry and called for an urgent return to the targeted fiscal deficit of 3 percent.

KEY POINTS:

- Economy could grow around 7 percent in 2009/10 if U.S. economy bottoms by Sept.

- Economy could return to 8.5-9 percent growth in medium term if reforms are pursued.

- Fiscal deficit target must be set at 3 percent of GDP at the earliest.

- Interest rates remain high despite easing of monetary policy.

- Calibrated monetary policy approach needed for early return to high growth path.

COMMENTARY:

SIDDHARTHA SANYAL, ECONOMIST, EDELWEISS CAPITAL, MUMBAI:

"The survey is extremely forthcoming as regards to disinvestments, tax and other reforms, which is some kind of a departure from its usual trend.

"Not all these measures can really be implemented in a hurry. But the overall direction is that of gradually getting back to the path of fiscal prudence, moving away from subsidies and leakages and adopting greater market-pricing on a selective basis.

"There are a good number of suggestions around tax reforms and developing various segments of the financial markets. If this is to be taken as the roadmap of the government, then it has a lot to cheer for the capital markets over a sustained period of time."

GUNJAN GULATI, ECONOMIST, JP MORGAN CHASE, MUMBAI:

"Government's expectation of above 7 percent growth in this fiscal seems overstated as non-oil imports continue to contract sharply, which along with still weak credit demand, continue to suggest that investment cycle has not revived sufficiently.

"In addition, exports and private consumption are unlikely to revive sharply anytime soon given still soft global economy and likely weak agricultural earnings."

"While some support from government spending in the next week's budget can be expected, it is unlikely to offset the softness in private demand. Turnaround in investment cycle is critical to drive the recovery and here any premature rise in lending rates -- whether driven by expectation or policy actions -- is the key near-term risk."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA:

"The economic survey appears quite progressive and provides a thrust on giving market orientation and structural reforms that would go a long way."

"It is heartening to see that the survey has seriously raised concerns on fiscal consolidation and gives confidence that the budget will see a good trigger for disinvestment and rationalization of fuel and fertilizers."

DEEPALI BHARGAVA, ECONOMIST, ING VYSYA BANK, MUMBAI:

"The focus of the economic survey is fiscal reforms and cut in various subsidies; which is essential at this point in time when we are walking a tightrope -- at one hand, attempting to fulfill the pre-election inclusive growth promises and on the other hand allocating the shrinking revenues from an already strained budget. Thrust on tax reforms is also as per industry expectations.

"Emphasis on the efficiency in the end-use of subsidies deserves a special mention."

AMITABH CHAKRABORTY, PRESIDENT EQUITIES AT RELIGARE SECURITIES IN MUMBAI

"The survey is giving a clear direction on where the government is likely to move over the next 3 to 5 years. I'm quite excited. It is wrong to assume everything will be announced in the budget (on July 6). It is the strategic intent, a clear roadmap. The market should take it positively."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK (YESBANK.NS : 142.5 -1.1), MUMBAI:

"The government has indicated its medium-term agenda towards market reforms, fiscal consolidation among others. We believe the government will initiate some of these in small doses in the forthcoming budget."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"My sense is that the economic survey is a very pragmatic and pro-reform policy statement but I would see it as a more medium-term expression of intention of the government rather than recommendations which could be implemented in the very short term.

"As in the past, the stancing of the economic survey and that of the Union Budget have often been divergent and I expect similar divergence this time around as well."

MARKET REACTION:

- The partially convertible rupee was at 47.7850/7950 per dollar, little changed from 47.79/80 before the survey. It had closed at 47.88/90 on Wednesday.

- The yield on the most traded 2021 federal bond was steady at 7.19 percent, unchanged from before the survey. It had ended at 7.23 percent on Wednesday.

- The 30-share BSE (^BSESN : 14658.49 +13.02) index was up 0.48 percent, from 0.23 percent higher before the report.

BACKGROUND:

- The economy grew 6.7 percent in 2008/09, slower than 9 percent or more in the previous three years.

- Fiscal deficit surged to 6.2 percent of GDP in 2008/09 on higher spending and duty cuts to prime a slowing economy.

- India raised retail fuel prices by as much as 10 percent on Wednesday, the first increase this year, on higher global crude prices.

- Manufacturing activity in India slowed slightly in June but still expanded for a third straight month, on strong local demand. But exports fell for eight consecutive months in May.

- A policy adviser to the prime minister has said the WPI number could show an annual rise of 6 percent by March end, while the economy may expand 7 percent in 2009/10.

- India's monsoon rains this year are expected to be less than normal and weakest in last four years, prompting analysts to predict lower farm output and price rise in the months ahead.

- India's factory output unexpectedly rose in April, and analysts said it confirmed early signs of economic recovery and an end to the central bank's rate cutting cycle.

- In April, the central bank cut its key short-term lending and borrowing rates by 25 basis points to shore up faltering growth in the face of the global economic slowdown. It has cut the rate by 425 basis points since October.